Tasmania-based salmon farmer and retailer Tassal Group Limited (ASX: TGR) recently posted a net profit of $37.9 million on revenues of $430.9 million for the full year period ending June 30 2016. The group also delivered operating EBITDA of $82.2 million, which is up 13.2% over the prior financial year.
The final dividend is 7.5 cents per share to take the full year total to 15 cents per share on a yield around 3.6%. Earnigns per share on a weighted average basis were 33 cents, which is marginally down on the 34 cents delivered in the prior year.
The group will also issue 2.1 million shares under the earn out provisions included in its recent deal to acquire the De Costi Seafoods business for an upfront fee of $50 million, which was around 5x De Costi's estimated maintainable EBITDA of $10 million. Over the year net debt increased by $69.6 million mainly due to the De Costi acquisition, with Tassal's gearing climbing to 33.5% as at June 30 2016 as net debt of $133.4 million compared to equity of $404.4 million. This compares to a gearing ratio of 17.6% for the same period a year earlier
The thinking behind the acquisition was to shift Tassal from a pure salmon company to a salmon and seafood supplier that can gain synergies via scale and more efficient supply chains. The company also booked $1.1 million in integration costs related to the acquisition over the year and in my opinion the jury is still out as to whether it was a smart move or not considering the costs.
The good news is that revenue and earnings growth was once again underpinned by the growth in consumer demand and per capita consumption of salmon in the local Australian market. This is a tailwind that supports the company and given the complex nature of salmon farming Tassal is unlikely to have its dominant position as an Australian salmon farmer ever seriously threatened. Notably, its arch-rival Huon Acquaculture Group Ltd (ASX: HUO) has suffered a rocky start to life as a public company after recently downgrading its full year earnings expectations on the back of soft salmon prices.
Outlook
I sold my own modest share holding in Tassal Group about six months ago unconvinced its market-beating potential was strong enough compared to other investment opportunities. Fish farming is capital intensive and the success or otherwise of the De Costi acquisition has yet to be proven in my opinion.
The company said that the salmon pricing environment is currently favourable and this is expected to continue into FY2017 with a prediction of "increased revenues and operational earnings in FY2017". At $4.14 the stock trades on just 12.5x trailing earnings, although for me it doesn't tick enough boxes to make it investment grade.
